THE IDEA OF INDIA

Friday, September 5, 2014

Is it prudent for India to be
more FDI dependent on Japan than on the US?

Abusaleh Shariff and Amir Ullah Khan

The comparisons are unfair. One country
is led by a nationalist Prime Minister who has been a steadfast friend and a
source of personal inspiration. The other country is led by a President who has
been adversarial and a reluctant ally. Abeeconomics and Modinomics are
remarkably similar. Japan has been investing in infrastructure and
manufacturing both sectors dear to the Prime Minister’s heart. And most
importantly, while the US President might be wary of China, he is overtly
friendly to India’s mighty neighbour. Japan on the other hand makes no bones
about its animosity towards a country India competes with on all fronts,
including on serious border disputes. No wonder PM Modi is off to
Japan on his first trip outside the subcontinent for bilateral discussions, and
is also now spending an extra day beyond the three originally scheduled.

On top of the agenda will be
manufacturing. Modi has advised Indian Industry to
promote brand ‘(made in) India’ across the globe by producing and
exporting quality products. However the impact of this high level
budge can be lacklustre. Quality of the goods and services of day-to-day
use, for example, has improved reluctantly and slowly over the years, upon
the opening up of the economy during mid 1980s and decisively after 1991.
Yet R & Dexpenditure is poor and often considered wasteful
due to weak association with immediate cash flow. The level of competition in
manufacturing sector is meek and has not matured yet. The Indian
industry and manufacturing must improve design, durability and safety besides
being visibly pleasing and environmentally friendly, to define ‘Brand
India’.

The rules of free trade and
openness are supreme in the interplay of international
investments,and India has to set its priorities correct, lest those trapped
in poverty suffer. So far the dominant FDI destinations are in the
services sector and real estate; which must be redirected to massive
infrastructure creation, power generation, oil and gas extraction,
refining, health care including pharmaceuticals and food production and
processing. Indian industry therefore will have to focus its attention on
these core areas, with the aim of developing quality products that are
innovative, efficient and differentiated. The new business models needs scaling
up and reaching out to sectors that will define growth in the future.

Why do we however sense
some procrastination on part of the Indian Industry? There are
two sides to this - the demand and the
supply. Exposure to the ‘goodies of the new world technology’ is new
and consumer has limited knowledge of consumer choice and rights. On the supply
side in spite of assured returns of over 30 per cent per annum, the
Indian industry is not motivated enough to improve product quality.
The answers to such anomalies lies in the structure of industry defined in
terms of manufacturing methods, technology and market segmentation. The
root cause of inertia in Indian industry can be traced to constraints to
funding needed for technological up-gradation and increasing the size of firm
itself given the expanded domestic demand.

Such constraints are reflected in
cost of developmental capital which is far high compared to international
standards. There is a growing need for investable funds in
almost all spheres of manufacturing and services sectors. Need for capital
investment is in all areas of infrastructure (road, rail,
port, rivers etc), power generation, oil and gas, refining, food production and
processing and many more. Banks are unwilling to
lend especially to stalled projects. In other words the FDI and
FII needs are immense. What is in India’s interest is assured
source of investment funds serviced at a competitive or mutually
agreed upon long-term rates.

It is in this context that Japan
becomes relevant as the source of cheap investment capital for India’s
infrastructural and industrial development. Japan is considered
a source of long-term and low-cost
finances. ‘Japan International
Cooperation Agency (JICA)’ has 60 % stake in creating
Delhi metro-network one of the largest in the world and most
recent. About $2.7 billion with rates less than 2 % and 22 % of this loan
has been on no interest payment at all as per the DMRC annual report
2011-12.

The cumulative total FDI stock
has been $ 326.5 billion averaging between 8 to 9 billion
dollars per annum during recent years. However the most interesting analysis is
regarding the source countries – the UK accounts for 10 %, Japan 8 %
and USA 6%. But the irony is that36 % of FDI comes from one
country which is hardly known for its status as a global investor–
Mauritius. This followed by 12 % from Singapore and 3% of FDI coming
from Cyprus makes the quality of funding suspect. Such opaque
dealings especially at the international level appear to push India into
an uncertain world of development funding. It is in this
context that efforts must be made to strike transparent deals directly with
major economies of the world such as the USA and Japan.

A word of caution is important here.
Firstly, FDIs are not just funds from a foreign nation to India.
The virtuous FDI comes with technology, production and inventory
managements and exports. Japan as a source of FDI
appears good as a source of funds but not as a
destination of exports. This may be one of the reasons why major Japanese
investments are in infrastructural development as these do not have
export components. The USA is the largest consumer market in the world
with a 30% share. It will be in its long term interest that India strategically
enhances its engagement with USA that not
only provides cheap capital and ultra-modern technology but
also is the largest consumer markets in the world.

Secondly, there are two real
constraints - Japan is facing an uncertain economic future and a
depressed consumer market; and on the other hand, the US is
reluctant to invest in India. It is imperative that India identifies factors
for US procrastination and overcomes them. One caveat though is to find
how much of American investment is routed through Mauritius, Singapore
and Cyprus. Why does this happen? What is the role of NRI investments
from US and Europe in this puzzle? The European Union
should also be on India’s priority list, though it is still
in recession. There is a dire need for reverse
FDI from India especially into Africa that shows a
palpable increase in average incomes with a growing size
of the consumer market. India must quickly make
its presence felt in this continent and not lag behind
China and USA.

Wednesday, September 3, 2014

The BJP fought the 16th general elections on
‘development agenda’, so it claims yet it was obvious that communalism and
anti-Muslim rhetoric was the flipside to the landslide. The electoral slogans postured the
middleclass who were craving for more and faster development as if it can be
reaped from standing rice fields.
Development has to happen first before its benefits are realised, and it
is a tough and long process. However,
while the urban middleclass was enamoured with BJP’s overtures, the catalytic
was the communal undertones expressed in cryptic double meaning statements,
body language including colour codes, surrogate sibling overtures (of VHP,
Bhajrangdal and other ilks), and engineered communal riots. Sociological and applied economic
analysis have supported a trend that religious assertion and glorification of
social identity increases as the income levels increase.

The UPA was
seen by this influential electorate as more pro-poor and pro-minority. It is another essay as to why the Indian
middleclass postures are anti-poor and anti-minority. Suffice to stress that
the newly elected government cannot take such a stand not only due to the
compulsions of constitutional guarantees but also demands of the development
strategy itself. Given the history of
deep and extensive poverty incidence in India, the BJP government must follow
and improve the well laid out policies of poverty alleviation, religious and
social inclusion.

BJP’s good luck
was the segmented voting behaviour in India. BJP won 280 or 51% of MPs with
only 31% of popular votes. In many respects this is the fallacy of India’s
democratic system. Although now that BJP is at the helm of power along with
ultra-fringe parties such as the Shiva Sena; it cannot absolve itself from
addressing the issue of poverty and inclusiveness head on.

The electoral victory
speeches, the annual budget presentation and the customary Independence Day
speech of the Prime Minister all taken together do highlight the vision of the
BJP government with respect to poverty and inclusion. The importance of having toilets
near homes cannot be overemphasised, yet culturally its usage is easy said than
done. Similarly providing bank accounts to all in rural and urban area is a
noble idea to effect inclusiveness, but such accounts are intended to
distribute funds not accumulate savings and turn it in to investments.

However, so far
there is a lack of emphasis on provisioning of quality and affordable health
care to the masses, improving quality of elementary education. Extending
educational infrastructure to minority (Muslim) concentrated areas is
absolutely essential to achieve the dream of universal literacy. Given the
dominance of agriculture, aspects of land reforms and property rights are not
even mentioned let alone make it a priority which is essential to augment
investments in agricultural and improve productivity. There has to be clear emphasis on mechanism
to improve the MG-NREGA and implementation of the Food Security Act requires
greater government attention than the development rhetoric. Often the deep excluded geographic areas are
even excluded in the review and evaluation exercises - most of the government
initiated and controlled studies do not meet the methodological standards of
the modern evaluation and assessments.

Shooting down the planning commission and
replacing it with a committee of economist will centralize the power in to
bureaucracy and it a signal towards non-participation of state in nation
building. The Planning Commission was amenable to interacting with domestic researchers
and ideas carried forward from multi-lateral institutions. The Bhagwatis and Panagariays of this world I
am afraid are too trigger happy to shoot down the equity polices of India. It
is time that the new government must review immediately the progress in the
millennium development goals, human development and poverty alleviation.
Further such review and assessment must be undertaken at the level of the
district and states.

It
is therefore, essential that the BJP government understand unique and intricate
relationship between poverty alleviation, inclusiveness and development and ensure
that the future social and economic transformation must happen through the
process of education and cultural change. In this context two noteworthy
situations that inevitably evolve needs to be highlighted. Sectoral (economic)
imbalances favouring the modern technology and large manufacturing will receive
a much needed boost. Yet what will happen is that millions of workforce trapped
in low productive sectors such as farming, traditional artisanship, small
business and manual labour would face an extraordinary risk, should the new
government ignore their plight in its immediate policy formulation. Secondly,
the fiscal pressure and also some ideological difference may promote frugality
of social services and social subsidies. This will be an immediate threat to
millions of the vulnerable and deprived communities who will face increase in hunger,
deepening of poverty amongst selected social groups and geographic areas as
well as continued health vulnerabilities.

As a long term
strategy the BJP government must initiate immediate actions to ensure inclusive
decision making at the local levels namely the panchayats and town-municipalities with nominations of the excluded
groups such as the minorities. Envisioning an ‘equal opportunity policy’ and establishing
an independent ‘Equal Opportunity Commission’ will go a long way in
dispassionately addressing the issue of exclusion in India.

My Profile

Abusaleh Shariff is Chief Scholar at the US-India Policy Institute, Washington DC (since 2012) and President, Centre for Research and Debates in Development Policy, New Delhi (www.crddp.in). He Was a Chief Economist at the National Council of Applied Economic Research, New Delhi (1994- 2012). He also worked as Senior Research Fellow at the. Food Policy Research Institute, Washington D C 2008 -10. He was advisor (under a committee setting) to the Indian Prime Minister during 2004-6 and the Ministry of Home Affairs, Government of India during 2010-11 in the areas of inter-state relations and inclusive development policy reforms. Was on teaching assignments at various levels between 1973 to 1994. Was on teaching assignments at various levels between 1973 to 1994. He was nominated to the 13th (Indian) Finance Commission by the Finance Ministry, Government of India.